What Can Traders Learn From Investors?

Buy and Hold - Not Just For Investors Anymore

The term ' buy and hold ' has become largely interchangeable with long-term investing, but this doesn't mean that it's something a trader should be unwilling to do.

Traders don't just try to get in and out of trades as quickly as possible because they're trying to fit the mold - the issue is one of efficiency. Although everyone knows the market moves, we tend to forget that it moves in short bursts, rather than with a lot of daily consistency. Long-term investors are OK with this; they just want to stay invested so they can benefit from the points when stocks do move. Traders, on the other hand, are simply looking to avoid being in a stagnant stock or index. They prefer to find hot spots or stocks, making the most of time that would otherwise be wasted.

However, as a trader, it's easy to get into the habit of rapid entries and exits, even when you shouldn't. Take the run-up in crude oil prices between late 2001 and early 2006, for instance. Crude futures went from under $20 per barrel to over $70, for a gain of more than 250%. And if you had the full leverage that futures can provide, you would have done even better. Would a trader love to have an annualized gain of that magnitude? You bet! And it could have been achieved with only a handful of contract rollover transactions. However, trading oil futures in the short term (two weeks to three months) proved to be rather difficult over that four-year period. As choppy and erratic as oil prices were, most traders weren't able to reap the full benefit of the major move in oil prices. The most profitable oil futures choice, after commissions, may have been a buy-and-hold approach. It was, after all, a much more efficient trend than usual, and that's all traders are really looking for. (For more insight, read Ten Tips For The Successful Long-Term Investor .)

Larry William's said it best in his book "Long Term Secrets To Short-Term Trading" (1999). He points out that "the longer you can hold a trade, the more money you'll make." That's about the most effective way it can be said.

Diversification Is Always Prudent

Finally, traders should take a cue from the diversity investors seek, at least in a sense. A traditional investing strategy typically has a diversification component to it, primarily designed to limit volatility and provide more chances at holding a winner. Usually this involves spreading a portfolio out among all the major sectors, and sometimes dividing a portfolio up between different market capitalizations and countries. The idea, though, is simple - don’t put all your eggs in one basket.

Traders tend to be at the other end of the spectrum, solely focusing on just one market, or just a small set of securities. That, however, is still too much reliance on one kind of opportunity. For example, in a slow or sideways market , an index futures day trader may not have enough movement in any direction to even cover commissions. Or, in the same kind of involatile market, an option trader may find that time decay is far greater than the net gains of his or her slow-moving option trades. And even for stock swing traders , who focus on a particular group of names (like technology stocks), an individual equity really needs other stocks in the same sector or industry to move in the same direction. Otherwise, those trades make little to no progress.

In other words, any style, market, or strategy has a limited useful lifespan. While it's true that everything is cyclical and that hot markets that turn cold will eventually turn hot again, a one-trick pony may find that he or she is not getting enough viable opportunities over the course of a year to make it worth the effort. Most good traders have a couple of different ways to make monetary progress.

Conclusion

Nobody owns the corner on how to beat the market, but investors do understand several concepts that help reach that goal. Traders can use those same concepts too, and significantly improve their returns without significantly changing their approach.